Tag: inflation

My thoughts about Inflation For years, I was among those who could only associate inflation with the fact that prices rose across the economies. The cost of goods surged, and that in essence was inflation. But in as much as I dived in, I learned that inflation is not simply the one that makes the cost of our morning coffee cost way more than it conveniently affects everything else, inclusive of the macro economy, and it is not always as formal as we think it should be. Inflation is more like a process that is actively unfolding before us and sometimes it just takes a while to notice. Buy a bread, soda, fruits and other everyday supplies and then get the shock of your life, “Ah! This didn’t cost this much last month.” This is not a question of a few dollars, this is a question of a few cents more here and there. As you try to count the increase, you’ll probably not notice it if you do not chart it for months or years at a time. That’s inflation: gradual and unrelenting increase in the value of anything. How Inflation Starts: It’s Not Just Printing Money Inflation is often defined, and rightfully so to a significant degree, as a monetary phenomenon, as a process that stems from the emission of new money. But that is only half the picture. When a government decides to pump more money—like printing more bills or adding money into circulation—it does mean people have more cash on hand. But here’s the catch: if the amount of foods and services supplied is not similar, the situation becomes imbalance. There are more dollars on the economy hunting for the same commodities making prices increase. Just picture yourself in an auction where everyone is a little richer – kind of counters their stereotype of a penniless starving artist, don’t you think? They will begin bidding more, they will begin bidding higher, and before you know it, the price of that item has gone up. But that is one of the side of the story. In addition, let’s understand that inflation can also occur on the condition that the cost of manufacturing products increases. Well, let us imagine that there is an unluky occurrence that makes the available amount of the whole product such as the case of wheat where the weather has not been so favorable. Bread companies require wheat and so if the amount is small they are compelled to part with more for the same. They will then transfer that added cost to us consumers; meaning that loaf of bread you purchase on a weekly basis is now costly. This is called ‘cost-push’ inflation – meaning the costs ‘push’ up prices throughout the economy. The other way in which we can see inflation appear is when demand spikes dramatically. Imagine the end of the year when people are going shopping for gifts or new year equipment, electronics, toys or clothes. If such a demand cannot be met by companies, then comes the effect of increasing the prices of products in the market. It’s simple supply and demand: there are too many consumers demanding something and all need it now, yet supply cannot keep up with that rate hence the high prices they set. It is what economist refer to as demand – pull inflation because what we have here is demand that is pulling up the price. Why Inflation Isn’t Always Bad Here’s something that surprised me: Moderate inflation is not always a bad thing, in fact inflation helps the economy to grow and keep going in one way or the other. In fact, it has a much more important role in a healthy economy. Central banks such as the United States Bank, generally prefer small but constant inflation figures of about 2 percent per annum. This small rise compels the people to go for consumption and investment instead of preserving money. If you know there will be a small increase in the price in the future, there is a reason to take that car or phone now, rather than later. Think of it as a motivator. It means if people and businesses keep spending and investing then it keeps the economy going for a turn. However, when inflation rises, if it gets too high, is when things begin to move out of control. High inflation rates are known to reduce the purchasing power of citizens by rationing most basic needs while negative effects are recorded on investment budgets. And when it run on a negative side, which is called deflation, it all is also bad. Now let’s contextualise this by imagine if prices begin to decline universally. They tend to believe that sounds great but what it does is make people more reluctant to actually spend their money buying goods and services, the wait for the prices to go lower. This invariably results in an economic downturn which is hard to escape from. Inflation in Everyday Life Sometimes we do not realize that inflation is creeping higher because its impact may not be felt immediately, but accumulates gradually. To help you better, imagine all the daily needs an average individual incurs: foods, travelling, accommodation, bills, medication. But, let us consider the above costs rising each by a small percentage each month. At first, it’s manageable. Perhaps you simply forgo the morning cappuccino or order a take-out instead of dining out. But as inflation continues flea, it begins to devour a larger part of client’s expenses. This is a definite area where inflation really hits home – rent. Especially in some of the city regions, housing demand is high and as a result, rent can easily escalate way beyond inflationary tendencies in other industries. You might have seen and heard those people complaining that wages cannot even look for the living rates—well this is the reason behind. If what you are paid increases by 2% per annum but your rent, fares, electricity, water rates, and other necessities increase by 5% or even more, then you realize your buying power is diminishing even if your income has risen marginally. Let me make it easier for you; you’re now managing a small business. You purchase raw materials, bear some overhead costs such as electricity bill and hire workers and all these costs escalate during an inflation period. You can only transfer that cost to customer in parts and at some point the customer will look for an alternative service provider. So, inflation also forces companies to get creative: or perhaps they minimize portion sizes (why are there more air in chip bags now?) or look for less expensive solutions. Inflation, wage, and the wealth gap This is one of the more curious, and the – to some extent – disturbing aspects of inflation – how it in some way hits people so and so and not thus. For individuals with limited disposable income — anyone who is counting on a steady income stream, such as pensioners, or individuals on Social Security, this means that their cost of living rises considerably. Their wages remain stagnant, thus while their costs keep increasing they are not able to meet this through additional income. On the other hand, those investing in shares or property can perhaps gain, as these are usually inflationary products. There is also this similar domino effect on differences in wealth. This I think low and middle income households are hardest hit when prices rise because these have to spend more than a percentage of their income on basic needs like food and shelter. The remaining populations can, nonetheless, cope with it to certain levels since the well-off families can adjust easily — they may have stakes that will appreciate with the rise in the prices of goods and services or more freedom in disposal of their incomes. This difference in impact can expand the wealth disparity in the long run, which together with the issue of economic disparity is adored in numerous regions. About the Things That Governments and Central Banks Do in a Bid to Tame Inflation At this point, maybe you may be asking yourself, “If inflation gets out of hand, why don’t governments just stop it?” That is where central banks are participants of the regulation of inflation, such institutions include federal reserve or the European Central Bank. Flooding is one of the main strategies which they have chosen: the rates of interest. When inflation begins, central banks may increase interest rates since it reduces credit limit, therefore, promoting saving. This reduces purchasing and eases inflation sometime bringing the rate back to a tolerable level. But, there is the flip side here. If he hikes rates too high or too soon he would push the economy into a period of recession. It is a little like heaving when running on a road you want to maintain a steady speed you have to add and reduce to reach that speed without overpowering it. Living with Inflation Well, based on these statistics, how do we handle inflation in our personal life? Well, knowing about it is half the battle. Just the fact that prices will go up can help us prepare better – whether it means asking for a raise or being practical knowledge about where we put our money to save and invest. As an example, property investment is inflation proof as common in a property values tends to appreciate with time. Or think of investing in equities which generally increase over the years, especially inflation rates are higher. Some people might say, “I’ll just hold onto my cash,” but here’s the thing: always inflation reduces the value of money. What you can purchase with $100 today you cannot do the same 5 years later. Therefore, it is always possible to look for strategies to start accumulating wealth in small sum, although incredible slowly. The Bigger Picture Every economy experiences inflation, it’s natural and in one sense it is growth and change. And it isn’t until they start spiraling up or down that you can really feel the impact reach everyone else in ways that make life a little harder. Inflation is bad, isn’t it, but you can see how easy it is to see it as bad, but real simple inflation does good things — it keeps economies as alive and dynamic as the people that run them. The struggle is in finding that balance and, well, economists and policy leaders will continue to wrestle with it, as long as we’re here.READ MORE BLOGS

Tag: inflation

Understanding Inflation: What It Is and How It Affects the Economy

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